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Credit union tax exemption needs a review

For years bankers have complained about credit unions and their unfair tax advantages. And they are right to do so. It makes absolutely no economic sense to have two businesses, located right next to each other, offering the same products and services to the same potential customers, but one business has the incredible advantage of not paying federal and state income taxes. Obviously the tax exempt business has a huge competitive advantage.

What was once a dispute between financial institutions should now be viewed as an issue for all taxpayers. The federal government is running huge deficits. Minnesota has had several state government shutdowns. Policy makers can no longer ignore the revenues that would be generated by taxing the profits from the credit union industry, which controls just a shade under $1 trillion in assets.

All taxpayers subsidize the credit union industry, so we all should consider whether the credit union tax exemption is money well spent. To determine whether the exemption makes sense, we need to know whether there is a legitimate public policy purpose that justifies the tax exemption. Then, we need to know that the credit unions do a good job of fulfilling their tax exempt mission. Otherwise, the tax subsidy extended to the credit union industry is money poorly spent. If the tax exemption is no longer warranted, it should be repealed.

Credit unions earned their income tax exemption back in the 1930’s by serving “people of modest means.” People working at the same factory or living in the same neighborhood pooled their money together in a small financial cooperative. Deposits in the credit unions were used to fund small, consumer loans to the other credit union members. The credit unions served a legitimate public policy purpose: providing financial services to “people of modest means,” who generally were not able to get banking services elsewhere.

But, oh my, a lot has changed since the 1930’s. While some credit unions remain true to the original credit union mission, many credit unions have completely abandoned that mission. Rather than focusing on “people of modest means,” these credit unions target wealthy customers. You can review credit union branch locations, for example. A credit union might claim to serve the entire twin cities metro area, but they don’t branch in low- and moderate-income areas. They branch in middle- and upper-income areas. And credit union advertisements also demonstrate their focus. A credit union places two advertisements in my weekly hometown newspaper. The first advertisement promotes the credit union’s boat and RV loans, and the second promotes their wealth management services. It is shocking that credit unions do not pay one cent of state and federal income taxes, yet they can afford to spend millions on sophisticated advertising campaigns. Many credit unions also make a significant amount of loans to businesses, a situation that is diametrically opposed to their mission.

So, if these credit unions are no longer serving their tax exempt mission, have they lost their tax advantages? Unfortunately for taxpayers, they still receive all their tax benefits. Taxpayers should be gravely concerned about the fact that the credit unions enjoy a 100 percent income tax exemption, but there is a complete lack of accountability with respect to ensuring they fulfill their tax exempt mission. Every credit union enjoys the 100 percent income tax exemption without proving the percentage of income that is derived from serving “people of modest means.” There is no record keeping required to earn the income tax exemption. Even if a credit union derived only a tiny fraction, or none, of its income from serving “people of modest means,” 100 percent of the credit union’s income is tax exempt.

Even among tax exempt entities, the credit union industry’s tax exemption is especially generous. Many non-profit entities must track income earned from activities that fall outside their tax exempt purpose. If these non-profits earn income from a source that is outside the scope of their tax exempt mission, they must pay unrelated business income tax (UBIT) on that income. Credit unions do not.

For the sake of all of us taxpayers, it really is time that policy makers take a fresh look at the credit union industry’s income tax exemption.

Joe Witt is the President and Chief Executive Officer of the Minnesota Bankers Association.